CEO incentive compensation and earnings management: The implications of institutions and governance systems

Almadi, M and Lazic, P 2016, 'CEO incentive compensation and earnings management: The implications of institutions and governance systems', Management Decision, vol. 54, no. 10, pp. 2447-2461.


Document type: Journal Article
Collection: Journal Articles

Title CEO incentive compensation and earnings management: The implications of institutions and governance systems
Author(s) Almadi, M
Lazic, P
Year 2016
Journal name Management Decision
Volume number 54
Issue number 10
Start page 2447
End page 2461
Total pages 15
Publisher Emerald Publishing Limited
Abstract Purpose: The purpose of this paper is to investigate the impact of CEO incentive-based compensation on earnings management, taking into account the influence of institutional settings and corporate governance systems. Design/methodology/approach: Using archival data of 3,000 British, Australian, German, and Austrian firm-years between 2005 and 2014, the study applies fixed-effect estimator to reduce risks of endogeneity bias. Findings: The findings reveal that institutional factors influence the relationship between CEO incentive-based compensation and earnings management. Particularly, firms from countries within the Anglo-American model (the UK and Australia), which provide greater protection for investor, stricter legal enforcement, and higher quality of corporate governance, tend to have lower level of earnings management. However, besides corporate governance quality, it is relevant to consider weaker investor protection and legal enforcement to motivate earnings management in firms from countries within the Euro-Continental model (Germany and Austria). Originality/value: The study suggests that robust implementation of corporate governance, derived from either model, helps in restraining CEO opportunistic behavior. Importantly, more qualified institutions have higher impact on the relative adequacy of CEO incentive-based pay formulas in mitigating earnings management concerns. This can be extended by future research through comparative studies using other contexts or influential institutions.
Subject Business and Management not elsewhere classified
Marketing not elsewhere classified
Keyword(s) Anglo-American corporate governance model
CEO incentive-based compensation
Earnings management
Euro-Continental corporate governance model
Institutional factors
DOI - identifier 10.1108/MD-05-2016-0292
Copyright notice © Emerald Group Publishing Limited
ISSN 0025-1747
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